In the May 2007, rebalancing the balanced and aggressive portfolios had only two of the top five most selected funds common to both. These were First State’s Asia Pacific leaders fund and the Artemis European growth fund.
The November 2007 rebalancing saw this number rise to three. This reflected the increase in instances that the Schroder UK alpha plus fund was selected in the panellists’ aggressive portfolios, making it the most popular fund.
Chelsea Financial Services managing director Darius McDermott says the market outlook last November led him to make defensive switches in his AFI portfolios.
He says: “The changes we made during the rebalancing in November reduced the risk across all of our portfolios.”
The May rebalancing continued the trend with the BlackRock UK absolute alpha fund gaining selection in the aggressive portfolios of five advisers and finding a place in six balanced portfolios.
Barclays Wealth associate director Kypros Charalambous says: “The environment we are in now would encourage caution across the board and advisers will be trying to reduce equity exposure. There is an element of panic out there at the moment.”
However, McDermott says challenging market conditions should not necessarily mean that the risk mandates in the separate AFI portfolios must become a single cautious one.
He says: “We have no overlap between our aggressive and balanced portfolios. When we are building our balanced portfolio, we are looking for more cautious funds on our buy list. For our aggressive portfolio, we tend to use more focused funds.”
Charalambous says the risks of having funds that hedge downside risk to long positions by using shorting could potentially be worse than simply underperforming long-only equity funds if markets recover.
He says: “At some point, if we saw a 2003-type recovery, I would expect to see a reduction in exposure to these alternative products. In a strongly rising equity market, these funds could see a lag in performance.”
Waiting to pull out of these products as markets start to recover, however, is an inherently risky strategy as calling a long-term switch in the market has historically been a difficult one to make.
McDermott says the differing fund selection by AFI panellists reflects the differences in the priorities of the firms they represent.
He says: “The beauty of the AFI is that you are getting the views of various people. People running cash for high-net-worth individuals will probably have more of their clients’ money in cash and defensive products.
“As a discount broker, however, we do not run cash for our clients, we just recommend funds, so that our perspective is different.”